Deed-restricted housing: how resale limits work, pros and cons

Deed restricted housing is a home sold below market price with rules written into its deed, the legal paper that records who owns it. The rules usually limit what you can sell it for later and require you to live there. They stay with the home, so every future owner must follow them too. Before you buy, read the actual restriction.

What does deed restricted mean?

A deed restriction is a set of rules attached to a home's legal papers and recorded with the county. Housing Eagle County in Colorado explains that the rules stay with the property and apply to every future owner, no matter who buys it next. You still own the home.

In affordable housing, a city, county or nonprofit sets the rules so the home stays affordable for the next buyer. In return, you pay less to buy. Sometimes a program pays part of the price for you when you buy.

A deed restriction is one way a home becomes below market rate, priced under what similar homes sell for. Compare it with a community land trust home, where a nonprofit also keeps the land, before you choose.

How does the resale price limit work?

The deed restriction names a formula, and when you sell, the formula sets the most you can ask. Some homes are paid for in part by the HOME Investment Partnerships Program, a federal grant from HUD, the U.S. Department of Housing and Urban Development. The city or state that gives out that money chooses one of two rules. A resale rule limits your sale price. A recapture rule makes you pay back some or all of the grant money if you sell early. When it uses the resale rule, HUD's rule lists four kinds of formula:

• Itemized formula. Start from the price you paid, then add or subtract set items, such as approved improvements.
• Appraisal formula. Split the rise in value between you and the program, measured by licensed appraisers, professionals who estimate what a home is worth.
• Index formula. Raise your price by the change in a public figure, such as the area median income, the middle income in your area.
• Fixed-rate formula. Raise your price by a set percent each year.

Programs that don't use this federal grant pick their own formula. Summit County, Colorado, for example, pays people who buy a home with no restriction to put a deed restriction on it. One of its two options limits the rise in price to 3% a year. In San Francisco, you work with the city's housing office to set your sale price. The office then picks the next buyer by lottery, a random drawing among people who qualify.

What does a price limit cost you when you sell?

A price limit costs you part of any rise in your home's value when you sell. Say you buy a condo for $250,000, and your deed restriction lets the price rise by 3% of what you paid each year, or $7,500 a year. A similar home with no limit rises 5% a year. After seven years:

In this example, the limit costs you about $49,300 of growth. That is the trade: you got in at a lower price, and you give up part of any rise in prices. Your mortgage payments still pay down your loan, so you own more of the home over time either way.

The limit is the highest price you may ask, not a promised one. You still need a buyer who qualifies and wants the home at that price.

What else can a deed restriction require?

• You live there. Eagle County says the home must be your only home, lived in full time and year-round. San Francisco doesn't let owners rent out any part of a below-market home.
• Who can buy or live there. Some programs set an income limit, the most a household can earn and still buy. Others look at where you work. Summit County's two options both require a local worker to own or rent the home, and neither has an income limit.
• Improvements. Eagle County says approved renovations can often be added to your resale price. San Francisco lets owners start claiming improvements 10 years after the home's first sale.
• How long the rules last. San Francisco's last for the life of the property. Homes paid for in part with the federal HOME grant must stay affordable for at least 5, 10 or 15 years, depending on how much of that grant went in.
• Yearly checks. Eagle County says program staff often check once a year that you still follow the rules. Serious violations can lead to penalties, losing the rise in value, or being required to sell.

What are the pros and cons?

Pros

• You pay a lower price to buy.
• You build some equity, the part of the home's value you own, even with the limit.
• Your monthly payments go toward a home you own instead of rent.
• The next buyer also gets a lower price.

Cons

• You keep only part of any rise in value when you sell.
• You can sell only to a buyer who qualifies, and often only through the program.
• You usually can't rent the home out or use it as a second home.
• You follow the program's rules and checks for as long as you own the home.

How do you check a deed-restricted home before you buy?

1. Get the deed restriction itself. Ask the office that manages it for the document, and read the parts on resale, renting and improvements.
2. Ask for the resale formula. Which kind is it? Does the yearly rise build on itself, or is it a set amount each year?
3. Ask who can buy from you, and how long resales usually take.
4. Ask what happens if you need to move or rent it out, for example for a new job.
5. Check your income with our qualify check, then browse homes for sale on our listings page or your state's page, such as Colorado. Some are below market rate homes sold by lottery.

If you'd rather rent, apply for income-restricted apartments, which have a lower rent for households under an income limit.